The Financial Accounting Standards Board added a hot item to private company accounting and finance professionals’ summer reading list.
It comes in the form of a proposed Accounting Standards Update aimed at simplifying consolidation rules for variable interest entities. The proposed ASU, stemming from a recommendation of FASB’s Private Company Council, would provide a “private company alternative” to simplify accounting for VIEs, with the scope of private companies being all entities except for public business entities, not-for-profits, and employee benefit plans.
Following are highlights of the proposed ASU, excerpted from an accompanying FASB in Focus:
Related party interests are also addressed in the proposed ASU, which would “eliminate mandatory consolidation for situations in which power is shared among related parties or when commonly controlled related parties, as a group, have the characteristics of a controlling financial interest (but no reporting entity within the related party group individually has the characteristics).”
How much will the proposed ASU help?
The proposed ASU carries its own complexities in establishing which entities meet the criteria to apply the simplified alternative. The last bullet point above, as to status of both the parent company and the legal entity being evaluated for consolidation, is a key consideration.
Additonally, the section of the proposed ASU dealing with related parties, which aims to simplify determining which entities among a commonly controlled group must consolidate VIEs, includes the following points:
Separately, the proposed ASU aims to simplify reporting of decision-making fees on a proportional basis as follows:
The FASB seeks comment from stakeholders (including but not limited to private company financial statement preparers, auditors, users of private company financial statements such as lenders and others), as well as non-private company stakeholders, by the Sept. 5 comment deadline. The FASB has not yet proposed an effective date for the proposed standard, indicating the board will make that determination after considering input on the proposal.